Explained | Is RBL Bank in trouble?

On December 27, 2021, the bank’s stock plummeted, losing as much as 23% of its market cap at its lowest price during the day before closing down about 18%.

Shares of RBL Bank plunged today, after its CEO and mD Vishwavir Ahuja went on medical leave and RBI appointed an additional director over the weekend. RBI clarified that the RBL is well capitalized and financial position remains satisfactory. Photo : Bijoy Ghosh

The story so far: The Reserve Bank of India (RBI) on Saturday appointed Rajeev Ahuja as the interim managing director and chief executive officer of RBL Bank while the bank’s long-time MD and CEO Vishwavir Ahuja left the post opting for a medical leave. On Monday, the bank’s stock plummeted , losing as much as 23% of its market cap at its lowest price during the day before closing down about 18%.

Why did the RBI intervene?

The

RBI in a statement released on Monday said that it intervened to appoint an interim CEO under Section 36AB of the Banking Regulation Act, 1949, since it “felt that the board needs closer support in regulatory / supervisory matters.” The central bank also clarified that RBL Bank is well capitalized and that it is in a satisfactory financial position. "The RBI's long-term discomfort with [RBL Bank's] asset quality risks as seen during Covid, and poor compliance with its directives could have possibly led to its swift intervention," noted Anand Dama of Emkay Global. There has also been speculation that the RBI may have been unhappy with the bank's write-off of certain loans.

As of September 30, 2021, RBL Bank’s capital adequacy ratio, which is an indicator of how much percentage loss a bank can incur on its risky assets before it becomes insolvent, was at 16.33% as against the minimum Basel norm of around 10%. The bank’s liquidity coverage ratio, which is a measure of how much liquid assets a bank has to cover cash demands over a certain number of days in case of a crisis, was at over 150% as against the regulatory requirement of 100%. The bank has also provisioned for over 76% of its gross NPAs, or it has recognized over three-fourths of its gross NPAs as losses, thus reducing the chances of any future negative earnings surprise.

Is RBL Bank in trouble?

Even though the financial metrics mentioned above paint the picture of a bank that is not in any immediate trouble, the market has been spooked by the RBI’s action on Saturday. The bank’s new interim CEO and the RBI have assured investors that all is fine with the bank. But investors are still wary of hidden risks that may be known only to insiders within the bank and authorities in the RBI. "Current developments have raised concerns about the bank’s ability to sustain a turnaround in its operating performance," noted Nitin Agarwal in a Motilal Oswal research report.

Asset quality issues can certainly be hidden by bank officials through accounting tricks and other means. Plus, RBI intervention in a financial institution has generally been followed by more unpalatable facts about the institution coming out in the open gradually. This was certainly the case during the Yes Bank crisis.

It should be noted that the balance sheet of RBL Bank came under stress in recent years and the pandemic has contributed to a significant increase in the size of the bank's non-performing assets. While RBL Bank’s loan book has doubled since 2017, the size of its bad loans has grown by more than seven times during the same period. The bank has expanded its loan book mainly through aggressive lending to retail borrowers. It has particularly focused on extending unsecured credit card loans which are highly prone to default and low recovery rates. In fact, credit card and microfinance loans constituted well over half of the bank’s retail loan book. All this has led to an increase in defaults.

What lies ahead?

Many consider the RBI’s intervention to be a matter of serious concern and believe that trouble may be brewing in RBL Bank behind closed doors. The RBI’s intervention, despite words of comfort spoken by RBI officials to allay investor fears, is generally seen as an indication that something may be wrong. So analysts caution investors from going long on shares of RBL Bank. For now, it seems like the RBI has managed to avoid any run on RBL Bank by depositors. As a matter of policy, the RBI and the government generally do not allow bank depositors to lose money in order to protect public confidence in the banking system. If asset quality issues prop up in the coming days and RBL Bank’s solvency comes into question, the bank may be merged with a larger bank which will be forced to accept losses.